Amazon’s Secret Formula Could Keep It From Ruling the World

Real-time statistics of transactions on Taobao and Tmall, the two main shopping sites of Alibaba, as the Chinese e-commerce giant neared $6 billion in sales in one day. Photo: Imaginechina via AP Images

In The Everything Store, the just-released history of Amazon, author Brad Stone recounts a conversation between founder and CEO Jeff Bezos and the company’s first employee, Shel Kaphan. Amazon, then just a bookselling business, was growing quickly in the mid-’90s, and Kaphan wondered aloud to Bezos whether the company’s relentless focus on getting bigger was really necessary.

“When you are small, someone else that is bigger can always come along and take away what you have,” Bezos reportedly replied. “We have to level the playing field.”

The strategy worked to breathtaking results. But that success may be about to run into a wall built by overseas online retailers turning Amazon’s own model of success back on Amazon itself. Compared to other traditional U.S. retailers, Amazon has been uniquely successful at selling internationally. But if Bezos hopes to replicate Amazon’s U.S. growth curve abroad — a curve that is really the only definition of success in Amazon’s lexicon — he may be too late. Others may have already learned Amazon’s lesson too well.

Earlier this week, Chinese e-commerce giant Alibaba Group held its annual rebate extravaganza on Singles’ Day (a.k.a. 11/11), a kind of Valentine’s Day meets the day after Thanksgiving. The company says it did nearly $6 billion in sales. That’s almost 10 percent of Amazon’s total sales last year — in one day.

A caveat: Alibaba’s sites operate more like eBay than Amazon, which means it’s only keeping a fraction of that $6 billion. Even then, it’s a stunning figure. Last year, ComScore said U.S. consumers on Cyber Monday spent a little less than $1.5 billion across all online shopping sites. Spending over the entire five-day Thanksgiving holiday weekend doesn’t even reach Alibaba’s one-day total.

What’s more, Alibaba’s 2013 Singles’ Day sales record represents a more than 80 percent jump over last year. If growth and size mean everything in online retail, then Alibaba is following the Bezos playbook flawlessly. It also means Amazon could have as much trouble topping Alibaba in China as other online retailers have beating Amazon in the U.S.

Over the Himalayas, one company that with eBay’s backing is trying to become the Alibaba of India is also trying to execute on Bezos’ maxim, though it’s in much earlier days than its Chinese counterpart. Snapdeal said today that it’s on track to show a half-billion in top-line revenue this year, up six-fold from the same time last year. The number itself isn’t that big, but the growth is. Snapdeal CEO Kunal Bahl says India’s total retail market is something like $600 billion, less than one percent of which is e-commerce.

Like Alibaba in China, Snapdeal is trying to supercharge the growth of online retail by focusing on providing a platform for established brands, which is intended to overcome the trust deficit inherent in asking people to shop in a way they never have before. There’s a long way to go, but in a country of 1 billion people the room for growth is staggering.

India, like China not long ago, lacks much of the logistical infrastructure taken for granted in the U.S. Shipping, payment networks, and supply chains aren’t as consistently established or efficient, which has required would-be online retailers to engineer more of their own systems. They couldn’t simply plug into UPS as Amazon did.

Yet in one important way the absence of smooth rails has forced companies like Snapdeal to stay nimble in a way that favors rapid growth. Snapdeal hasn’t poured lots of time or money into building massive warehouses to store huge amounts of centralized inventory that weighs down its balance sheet, as Amazon has long done to the detriment of profit. Instead, Snapdeal is “aggregating the long tail of supply,” Bahl says.

“That’s really where the meat of the market is.”

Such a marketplace model allows companies such as Snapdeal and Alibaba to expand their selections much more quickly than Amazon ever did — no first few years just selling books. But it also makes it harder to ensure a consistent experience, the kind of rock-solid reliability that has acted like jet fuel in Amazon’s own growth engine.

But there’s another lesson taught by Amazon that’s also working against its prospects for success in India and China — the power of the first mover. As The Everything Store recounts, plenty of smart people in the mid-90s could never have imagined how Amazon would steamroll Barnes & Noble. But the brick-and-mortar book giant was slow to roll out its own competing website and never caught up.

In its last earnings call, Amazon CFO Tom Szkutak said Amazon is ramping up its own business-to-consumer marketplace in India, the same model used by Alibaba and Snapdeal. Amazon may have a lot of weight to throw around, but it will be interesting to see whether its efforts are too late to make it the leader in India, much as the Chinese market has become Alibaba’s to lose. Along with their established brands and relationships, companies like Snapdeal have the distinct advantage of being local. They don’t have the same cultural learning curve that Amazon does when stepping off its home turf.

“Emerging markets require a very deep understanding of the local market, the local consumer,” Bahl says.

“I’m sure they’ll get there,” he says of Amazon, “but they’re not there yet.”